On August 13, 2012, the United States District Court for the Central District of California issued the latest decision in Retired Employees Association of Orange County v. County of Orange, a case that has bounced from court to court over the last four years. At issue in the case is whether retired County employees have a vested contractual right to continuation of a “pooling” of their healthcare premiums with those of active County employees. The District Court resoundingly held that the County made no such promise to the retirees.
The District Court’s decision, and the Ninth Circuit’s recent decision in a companion case, Harris v. County of Orange, address the standard of proof a plaintiff must meet to establish a vested contractual right to a particular employment or post-employment benefit. The decisions unequivocally show that the plaintiff’s burden is a high one: the alleged vested right must arise from the text of the governing body’s legislative enactments, with extrinsic evidence considered only to resolve textual ambiguities.
From 1966 through 1984, active and retired County employees paid separate premiums for healthcare benefits. In 1985, the County “pooled” the premiums so that both active employees and retirees paid the same premium. Over the years, “pooling” resulted in the younger (and presumably more healthy) active employees subsidizing the retirees’ premiums. Effective January 1, 2008, the County eliminated “pooling” and established separate premiums for active employees and retirees.
Soon after, the Retired Employees Association of Orange County (REAOC), a nonprofit organization representing County retirees, filed suit in the Central District. REAOC’s complaint alleged that the retirees had a vested contractual right to the “pooling” practice, and that the County’s elimination of “pooling” impaired that right in violation of the Contracts Clause of the United States Constitution. The District Court granted summary judgment for the County, finding no vested contractual right to premium “pooling.”
REAOC appealed to the Ninth Circuit, which in turn certified the following question to the California Supreme Court: “[w]hether, as a matter of California law, a California county and its employees can form an implied contract that confers vested rights to health benefits on retired county employees.” The Court ruled that a vested contractual right may be found when “the statutory language or circumstances accompanying its passage clearlyevince a legislative intent to create private rights of a contractual nature enforceable against the [governmental body].” Thus, a vested right may arise either from express statutory language or by implication from the legislative enactment.
After the California Supreme Court answered the certified question in the affirmative, the Ninth Circuit remanded the case back to the District Court to apply the high court’s legal standard to the facts of the case.
Harris v. County of Orange
While the REAOC case wound its way up and back, the District Court heard the companion case, Harris. Filed in 2009 on behalf of a class of County retirees, Harris challenged the County’s elimination of a monthly grant toward retirees’ healthcare premiums. As in REAOC, the plaintiffs claimed the County had entered into an implied contract to provide the grant for the retirees’ lifetimes.
In its decision affirming the District Court’s dismissal of the breach of contract claim, the Ninth Circuit applied the California Supreme Court’s legal standard from REAOC. The court first stated that the plaintiffs must allege which specific provisions of a County resolution or ordinance they claim guaranteed the grant would continue. The court found that neither of the memoranda of understanding (MOU) presented by the plaintiffs contained language guaranteeing the grant, but nonetheless allowed the plaintiffs to amend their complaint “to set out specifically the terms of those MOUs on which their claim is predicated.”
The District Court’s Latest Order in REAOC
Using Harris as guidance, the District Court applied the California Supreme Court’s legal standard to the facts of the REAOC case. The court looked first to the County’s healthcare premium resolutions and found no language that indicated the County intended for “pooling” to be a continuing obligation. Instead, the resolutions were approved by the board of supervisors on an annual basis for the upcoming calendar year only. Further, “pooling” began in 1985 in response to a deficit caused by the County’s failure to collect enough premiums from retirees; “pooling” thus originated as “an immediate solution to an immediate problem.”
Because the court found no language in the resolutions that could be interpreted as creating a continuing obligation to “pool” premiums, the court declined to review the extrinsic evidence presented by REAOC, which included 23 years of “pooling,” informal remarks, and informational booklets never incorporated into a formal resolution. The court noted that “course-of-conduct” evidence cannot be used to create an implied contract where the language of the resolution cannot be interpreted to create one.
The California Supreme Court’s REAOC decision left both public agencies and retirees with uncertainty about whether it signaled a move toward increased judicial recognition of implied contracts guaranteeing employee benefits. Harris and the District Court’s latest REAOC decision show that, in practice, it is difficult to establish a vested contractual right to a benefit. The plaintiff must first present a legislative enactment whose text can be read to create the claimed right – only then will the court look to evidence of the parties’ conduct. In both cases, the plaintiffs failed to produce any statutory language that could be interpreted as creating a contractual obligation. Thus, at least initially, it appears that courts will subject claims of a vested contractual right to a high level of scrutiny.